Insight & Analysis

Making SCF inclusive: a blueprint from Asia

Published: Nov 2018

Around half of South East Asian SMEs have been rejected by banks for working capital loans. A damaged supply chain is no good for anyone but one expert argues that the region has the potential to act as a blueprint for other regions in finding a fix.

Big business has long enjoyed benefits not available to smaller players, from apparent market monopolies to economies of scale. In turn, small businesses enjoy their own advantages, being able to move at speed and retain much more flexibility in their decision-making than their bigger counterparts. Often, it is also these small businesses disrupting sector practices, ushering in innovative technologies as a way to level the playing field. However, says David Philbin, Head of Subsidiary Banking, MUFG, “in the world of supply chain financing (SCF), the advantage lies firmly with the big guys”.

“For years, there has been discussion about how SCF could be made more efficient to support smaller corporates,” he notes. “But significant change has not yet been forthcoming and SCF continues to focus on the needs of larger corporates while SMEs can often be excluded, especially in Asia.”

This, he notes, is a problem for smaller corporates because, given their limited collateral, many of those rejected by banks for working capital loans struggle to maintain a healthy cash flow. “As a result, they are forced to pay very high finance charges – so beginning a vicious cycle which can not only inhibit growth but also threaten survival.”

Since the start of 2018, many economic commentators have declared the world economy to be in growth mode, with markets booming. However, just in the last few weeks, we have seen stock markets dropping. Of course, this doesn’t mean an economic downturn or recession is around the corner, says Philbin. But if economic growth does start to slow, access to reliable finance becomes even more critical for companies.

SME exclusions

The shortfalls of SCF beset small companies across the world, but the problem is most acute in South East Asia. Here, around half of SMEs have been rejected by banks for working capital loans. There are a range of reasons why the region is more difficult to operate in than the US and Europe, including the more stringent regulation, currency control and state control.

“As most large corporates don’t necessarily need to include each and every one of their suppliers in a SCF programme, these factors mean corporates often avoid the hassle of including some of their smaller suppliers,” says Philbin. “These excluded suppliers are the ones who need the greatest support.”

If South East Asia is to sustain recent levels of growth, a solution must be found and Philbin says corporates are beginning to recognise the benefits of establishing SCF arrangements with more of their suppliers. But he notes that efforts so far “have run into a number of roadblocks”.

Intermediaries who stand between a bank/banks providing the finance and large corporates looking to help their suppliers have invested materially in the region in recent years. Yet the regulatory climate has inhibited further investment and expansion in the region, while supplier habits die hard.

Those who are less technology savvy are particularly rigid in their behaviour, and as a result many of the platforms have pared back their investments in the region, leaving SMEs again short on working capital.

Technology often provides more accessible solutions to smaller corporates, but this too has its challenges where SCF is concerned. Practicalities such as handling a large number of platforms, the need for testing and due diligence means many banks have struggled to facilitate such proliferation.


The answer is three-fold, argues Philbin. “A first step is supporting and accelerating the move away from paper-based systems, despite the continued resistance in some countries. Secondly, governments need to introduce more flexible local regulation to encourage banks to provide SCF. Thirdly, banks must get better at managing complex documentation and on-board large supplier numbers across wide geographies.”

Perhaps developments around blockchain will help make this easier in the future. In the meantime, banks with a strong local or regional presence – whose SME customers will include many of those suppliers who want to benefit from earlier payment by their buyers’ banks – will already have undertaken time-consuming KYC checks, and can do this quickly for any new suppliers to be added. This can often represent the final 10-20% segment that the global banks may not include in programmes – and it is these businesses, notes Philbin, “who may need it most”.

In taking this approach, South East Asia has the potential to act as a blueprint for other regions. Innovation often has the effect of leapfrogging more established players. Successful implementation here, while bringing obvious economic benefits to the region, will also illustrate how SCF can be better employed elsewhere, explains Philbin. “It’s not a simple undertaking or a quick win. But action here could revolutionise SCF across the globe.”

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